The U.S. Federal Reserve announced recently that they would be increasing the federal funds rate by .75 percent, which is the largest increase since 1994.
The increase is designed to slow inflation by making it more expensive to borrow money and decrease the demand that surged when interest rates were at historic lows in 2020 and 2021. The recent rate hikes will affect everyone, even if you’re not planning to borrow money for a house, car, or other assets, and many people are about to lose their jobs.
The fed has officially burst the bubble, and the long-awaited recession is on the horizon.
As media outlets were busy printing article after article about why you don’t have to worry about the next housing crash, we were predicting the obvious crash back in December of 2021. The question is, how bad will the crash actually be?
Will the economic peril Americans are about to face resemble 2008, or will it be an economic crash similar to what Japan experienced in the 1990s which the country still has yet to recover from?
China has already begun to find out what that looks like.
Based on current economic indicators, the crash in Japan will pale in comparison to what’s about to happen to China’s economy, and many experts believe the US is next on the list of economies to fall.
Similar to the US, China’s economic growth has been remarkable over the past several years, property prices have continually risen, and investors have piggybacked off that growth by investing heavily in real estate.
Property accounts for 70% of China’s household wealth, and real estate has generated the highest number of billionaires in the country. The total value of China’s housing market is double the US residential market, hitting $52 trillion in 2019, and China’s real estate market accounts for nearly a third of their gross domestic product (GDP.)
Driven by China’s famous ‘Ghost Cities,’ as well as other factors, the Chinese crash began a while ago without much media attention. The media only began to notice when Chinese real estate developer, China Evergrande Group, defaulted for the first time on dollar debt.
Similarly, after the Fed warned of a brewing housing bubble in April, the media narrative in the US began to shift as well.
The Housing Crash is Here
Similar to what China has done recently to slow inflation, the Fed is attempting to raise interest rates in order to slowly deflate the massive bubble that has expanded over the past two years.
The Federal Reserve raised its benchmark interest rates three-quarters of a percentage point in its most aggressive hike since 1994. Some economists are predicting that the benchmark rate will end the year at 3.4%, which is an upward revision of 1.5 percentage points from the last estimate in March.
The Fed was probably a bit late in its decision to do this, but it really didn’t matter what the Fed did, the bubble was going to pop.
U.S. mortgage rates have reached their highest level in more than 13 years, the latest sign of the coming market decline tied to the Federal Reserve’s attempt to cool inflation. Mortgage buyer Freddie Mac reported that the 30-year rate climbed from 5.23% last week to 5.78% this week, the highest its been since the last housing crash in November of 2008.
Last week, rates surged even higher with the average rate hitting 6.28%, according to a daily measure from Mortgage News Daily.
With the recent rate hikes, inflation hitting the highest levels in 40 years, and the cost of home ownership breaking records, buyer and investor demand in the housing market has begun to completely collapse.
Total mortgage application volume was 52.7% lower last week compared to the same period one year ago, according to the Mortgage Bankers Association’s seasonally adjusted index. The number of homes bought by investors dropped nearly 20% in the first quarter of 2022, and Redfin, a real estate company, said the number of investor purchases in their 10 biggest metros all went down.
Following new home construction jumping a whopping 22% in February compared to a year ago — the fastest new build growth rate since 2006 — home builder confidence has also plummeted.
A new poll conducted by the National Association of Home Builders shows builder confidence in the market for new single-family homes is at its lowest level since June 2020 after six straight months of decline. NAHB Chairman Jerry Konter said recently that this is “a clear sign of a slowing housing market in a high inflation, slow growth economic environment.”
According to a recent report from Bloomberg, builders are slashing their prices on new homes at an unbelievable rate, as the market cools and prices drop at the fastest pace since 2006.
In the Austin and Nashville metro areas, for example, the share of new builds with price cuts has quadrupled compared to last year, while newly constructed homes with price cuts have tripled in Phoenix and doubled in the Tampa, Florida, region.
For months new construction of homes has exploded while demand has plummeted, spelling disaster for the US housing market in the coming months.
New home-build starts are finally beginning to slow, and home-builder stocks are doing even worse than the general stock market which is down overall. Unfortunately, the slowdown in new home-build starts will not soften the blow the housing market is about to experience.
Both new builds currently under construction in the hottest housing markets in the US, as well as the number of homes about to hit the market, will soak up the coming big decline in new home construction starts. Sharply higher rates have caused a sudden decline in home sales, and now according to a report from CNBC, sellers are rushing to get in before the red-hot market cools off dramatically.
According to John Burns Real Estate Consulting in Irvine, California, another key metric to watch is the contract cancellation rate on new construction which topped 9% nationally in May, up from 6.6% in April according to the company’s survey of builders,
“The writing is on the wall that more supply is coming, no matter how you slice and dice the data,” research director at John Burns Real Estate Consulting, Rick Palacios, told Bloomberg.
The crash initially will likely be regional, with certain areas at more immediate risk for price drops than others. According to a recent analysis from Fortune, which used data from the real estate research firm CoreLogic, parts of the US vary from “very low” risk of home price drops to some areas that are “very high risk.”
Real Estate Layoffs and Foreclosures
Nearly 8,700 people in the financial services sector lost jobs from January through April, mostly in mortgage banking, as rising rates for home loans have torpedoed demand for refinances and purchases.
Layoffs hit two of the biggest names in real estate. First, Redfin announced new layoffs, then Compass, one of the nation’s largest residential brokerages, announced it’s cutting 10% of its workforce.
Real estate company Redfin announced on Tuesday that it will lay off about 8% of its staff amid a downturn in the housing market. Redfin CEO Glenn Kelman announced the layoffs in a letter to employees that was later posted on the company’s website.
“I’m sorry to say that we’re asking about 8% of our employees to leave Redfin today, or about 6% if you include the people of RentPath and Bay Equity,” Kelman wrote.
Redfin says that demand came in at 17% below expectations in May and the company doesn’t have “enough work” for its agents and support staff according to Kelman.
Freddie Mac deputy chief economist Len Kiefer tweeted at the beginning of June that the U.S. housing market is at the beginning stages of the most significant contraction in activity since 2006.
If all of this doesn’t underline the calamity the housing market is about to face, risky mortgages are apparently also making a comeback, and more foreclosures are on the horizon.
Adjustable-rate loans largely disappeared after helping to trigger the 2008 collapse of the housing market, leaving millions with mortgages they couldn’t afford. But over the past few months, surging mortgage rates have led to a comeback of some of the riskiest mortgage loans, driving concerns that some buyers are once again signing on for more risk than they can handle financially.
“ARMs are definitely becoming more and more popular,” Trey Reed, a loan officer for Intercoastal Mortgage in Fairfax, Virginia told NBC News. “In the last 90 days, we’re seeing probably a quarter to a third of all loans are ARMs. They’re an option that’s getting considered more than half the time.”
Additionally, up until July 31 of last year, there was a nationwide moratorium on all foreclosure and eviction proceedings. This means that if homeowners experiencing financial trouble were opting for the forbearance plan, banks would not proceed with foreclosure initiations or foreclosure sales during that period.
Many homeowners were able to dig themselves out of the hole that they were in, but many did not.
January 2022 saw a massive jump in the number of foreclosure starts. The database management company, ATTOM Data solutions, recently showed 23,204 foreclosure filings, a 700% year-over-year increase, according to Black Knight.
Today’s foreclosure starts, while much higher than recent past, are still below pre-pandemic levels, but serious mortgage delinquencies are up 55% over pre-pandemic levels. While there were approximately 400,000 serious delinquencies remaining before the pandemic, today there are roughly 640,000, the data shows.
According to a recent report from ZeroHedge, the typical 30-year fixed-rate mortgage is around $2,514, which is up from $1,692 a year ago.
Homes are more likely to sit on the market for a few weeks, and price cuts on listings are doubling, tripling, and quadrupling compared to this time last year. Real Estate companies are reporting that competition for existing inventory is in a steep decline, and sellers are dropping their list price in the highest share on record over the past couple of months.
All of this has made homebuyer sentiment implode to the lowest level in generations.
This Look Eerily Familiar
The dot-com crash haunts the memories of many investors on Wall Street, and this year’s stock market rout is a reminder of how quickly these things can happen.
The S&P 500 is down 19% since the beginning of the year, and the Nasdaq, which is heavy in tech stocks, has plummeted over 28%. As bad as that sounds, based on historical trends, we may not even be halfway through the stock market decline.
The crypto market has lost roughly $1 trillion in value year to date, Coinbase Global announced recently the company would lay off roughly 18% of its workforce, and the rest of the tech industry is getting hammered as well.
April brought news for Netflix that the content streaming company likely never thought would never happen: for the first time in a decade, its overall number of subscribers was down, and the company lost over $50 billion in revenue.
Netflix’s shares have collapsed another 75% since April’s news, and in an interview with The New York Times, CEO Ted Sarandos called the situation “horrifying.”
But Netflix was just one of many tech companies to show signs of cracking, and Investors have expressed concern that tech stocks are poised to emulate a repeat of the dot com crash.
Many of the homes bought in the hottest housing markets across the US were purchased by people working in tech, with jobs that allow them to work remotely. Over the past two years, many tech employees have opted to leave densely populated areas of the country and purchase homes in many of the smaller towns that have experienced red-hot housing markets during the same period.
The housing market isn’t the only thing in trouble, the ‘everything crash’ is here, and ‘Big Short’ investor Michael Burry predicted it yet again.
Michael Burry recently compared the market slump to a plane crash and said the tumbling stocks and home sales remind him of the housing bubble bursting.
“As I said about 2008, it is like watching a plane crash,” he said. “It hurts, it is not fun, and I’m not smiling,” said Burry on Twitter recently.
Burry shot to fame after he made a fortune betting on, the housing market crash in 2007 and 2008, and made a fortune betting on it. Burry also predicts the next market crash will dwarf the 2008 bust, which sparked a global financial crisis.
You don’t have to be a famous investor to read the bold impact text writing on the wall though. Most people understand that when inflation hits record levels, and the cost of homeownership surges by 50% as wages increase nominally, it means disaster.
“US Personal Savings fell to 2013 levels, the savings rate to 2008 levels- while revolving credit card debt grew at a record-setting pace back to pre-COVID peak despite all those trillions of cash dropped in their laps,” Burry warned in a now-deleted tweet.